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One of the biggest mysteries surrounding the arrest of Nissan's former chairman Carlos Ghosn is over how he allegedly could have underreported his income by millions of dollars for years and why the company is going after the suspected wrongdoing now.

Ghosn, who headed the Renault-Nissan-Mitsubishi Motors auto alliance, was arrested November 19 on suspicion he underreported his income by USD 44 million over five years, or about half of what he was really making.

Nissan Motor Co and Mitsubishi have ousted him as chairman; the board of Renault SA of France says it's waiting for more evidence.

Nissan is among a growing list of top-name Japanese companies whose corporate governance has been found lacking in recent years.

"Wait a minute. Who wrote the financial statements? The accountants. Who audited them? The auditors," Christopher Richter, auto analyst for CLSA Securities Japan Co., said of the case.

"How do you do this without other people being complicit?" Japanese prosecutors say Ghosn and another Nissan executive, Greg Kelly, an American suspected of collaborating with him, were arrested because they are considered flight risks.

But the timing of the scandal, given the length and scale of the alleged wrongdoing, is raising questions.

Kelly acted "according to the law and according to company policy," Hartwell said.

"He had talked to people in the company and to outsiders, and he believed everything he did was done totally legally," he said in a telephone interview from his office in Nashville, Tennessee.

Prosecutors have released very little information. Neither man has been officially charged.

Under the Japanese system, suspects can be held for weeks for questioning without any charges.

A source familiar with an internal investigation by Nissan said the hidden salary was categorised as "deferred income," meaning it was promised for later on, such as after Ghosn's retirement, and the documents promising the money were kept secret from auditors and others.

He spoke on condition of anonymity as he was not authorised to discuss such details.

One possible motive is that Ghosn was seeking to avoid public criticism over his multi-million dollar paychecks, which are a rarity in Japan even for top executives.

Ghosn was forced to defend his salary at shareholders' meetings beginning in 2010, when Japan began requiring the disclosure of individual executive pay.

Executive pay packages in the west tend to be higher Toyota Motor Corp's Chief Executive Akio Toyoda earns less than 400 million yen (USD 3.5 million) a year.

But many Japanese companies lack the sorts of systematic checks required for publicly listed US companies.

That includes periodically changing who checks financial statements instead of having the same people do it for many years. Japan needs independent oversight for executive pay, said corporate governance expert Takuji Saito, who teaches at Keio Business School.

"The problem here was that the pay was significant, in line with global standards, but the way it was decided was still so Japanese," he said of Nissan's lack of transparency.

"Nissan deserves criticism for having allowed this to continue unchecked for so long."

Saito believes that failing to report deferred income is still "a gray area in criminality" in Japan, but a clear problem in corporate governance.

It's certainly turned out to be a big problem for Ghosn, 64.

He is being held at a Tokyo detention center pending his indictment or release and has hired Paul, Weiss, Rifkind, Wharton & Garrison LLP to represent him.

Japanese media say, without citing sources, that Ghosn is asserting his innocence, insisting he always wanted his income reports to be legal and denying he signed secret documents. Prosecutors have refused to comment.

Whether a suspect intended to commit a crime or did it unknowingly is important in determining criminality under Japanese law.

Nissan veteran Hiroto Saikawa, who took over from Ghosn as the automaker's chief executive last year, has harshly criticized his former boss and vowed to instill greater transparency and accountability at Nissan.

The company is setting up a panel of outsiders to come up with recommendations, including reviewing the company's executive compensation system.

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)